How to Create and Read a Profit and Loss Statement

how to read a profit and loss statement

These statements are generated on a weekly, monthly, quarterly or annual basis, depending on the standard operating procedure of a business. It adds up your total revenue, then subtracts your total expenses, and gives you your net income. A multi-step P&L, on the other hand, requires you to perform multiple calculations in order to arrive at your final net income. The format you choose depends on the type of business you own and the purpose of the P&L you’re creating. The top section lists net sales followed by the cost of goods sold .

When planning your next year’s budget, look back at the P&L reports from a few prior years to hopefully catch any of these less frequent expenses. Overall we probably spent around $6,000 or more in 2018 compared to 2019. Besides computers, other things that could fall in this category are projectors or TV monitors, speakers, routers, modems, misc. Cords and adapters, digital cameras, virtual reality headsets, or any other technology equipment that your firm uses. Only include the purchase of physical assets in this category as the value can be depreciated on your tax returns.

Operating expenses

It’s possible for a firm to operate profitably without generating cash flow or to generate cash flow without producing profits. From an accounting standpoint, revenues and expenses are listed on the P&L statement when they are incurred, not when the money flows in or out. One beneficial aspect of the P&L statement in particular is that it uses operating and nonoperating revenues and expenses, as defined by the Internal Revenue Service and GAAP.

how to read a profit and loss statement

The result is a snapshot of profitability during the reporting period. The P&L statement displays your revenue and expenses over the period determined by your company (monthly, quarterly, yearly, etc.). Rather than showing how much is in your bank on a specified date, the P&L statement will show you a much more detailed view of your company’s financial position. Your business may have plenty of cash in the bank from loans and investors, but are you turning a profit? The bottom line of your profit and loss statement will tell you whether your company’s financial performance is positive or negative. This is calculated by subtracting total operating expenses from your gross margin.

Operating income

Similarly, expenses are recognized in the same period as incurred and COGS are recognized in the same period as the applicable revenue — this is known as the matching principle. For example, advertising expenses incurred in retail accounting the third quarter are recognized then, regardless of when they are actually paid. A profit and loss statement demonstrates the results of operations for a fiscal period, reflecting revenue, expenses, and profitability.

  • But this can also include income from other sources like franchise agreements, rental income or tax refunds.
  • Fill-in-the-blank templates of the three profit and loss examples above can be downloaded here.
  • This is a category that could balloon to a much bigger expense depending on your design process, how you manage projects, how many employees you have, and what software you use for various tasks.
  • Note that income taxes paid may be listed with expenses or subtracted at the end of your statement, just above the bottom line.
  • Over the next few chapters, we will understand each of these statements from the user’s perspective.

For this example the net operating income is $1,250 which means the company had a gain of $1,250. While it’s a positive that this company did not attain a loss, a profit of $1,250 is still low and the company should look to cut down on any insignificant expenses. An alternative to the single-step method, the multi-step profit and loss statement separates the operating revenue and operating expenses from other revenue and expenses.

Whether Your Business Operations Are Profitable

As you are setting up a new business consider the categories that you would want to track going forward. You could simply copy what is here or if you anticipate having different revenue streams feel free to add those to your report and have your bookkeeper categorize the revenue accordingly. It can be stressful, demanding, and there often seems like a million tasks that need your attention at any given time.

how to read a profit and loss statement

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